Munich Re developing new cover specific to oil drilling risk

Following the Deepwater Horizon oil spill in the Gulf of Mexico, Munich Re has developed a new concept for insuring offshore oil drilling — a concept touted to create cover of $10 billion to $20 billion per drilling operation in the international insurance market.As it stands now, operators, generally drilling joint ventures, may be held liable for death or injury, property damage, environmental impairment and financial losses in the event of an accidental occurrence. “Currently, there is no separate cover for drilling operations, which are insured under the individual liability policies of the companies concerned,” Munich Re observes in a press release announcing the development of the new cover. “As a rule, covers are available subject to a limit of US$1 billion to $1.5 billion on the international insurance market.”Under Munich Re’s new concept, each individual drilling operation would be covered by a policy specifically developed for that oil drilling risk. “As a result, it should be possible to increase liability limits to US$10 billion to $20 billion per drilling operation,” the reinsurer says. “Munich Re would be prepared to offer coverage capacity in the order of US$2 billion.”Based on the US Oil Pollution Act, the new cover would largely relate to clean-up and removal costs, impairment of natural resources and property damage, as well as loss of earnings in sectors such as fishing or tourism.Munich Re expects companies to be interested in such cover “because inability to pay high compensation claims can lead to insolvency, and mere speculation about such an eventuality can hit their share price.”The reinsurer said the concept requires a large number of wells to be insured, which could be brought about through market interest or, more importantly, the tightening of safety standards.